The markets appear to have finally started taking stock of the uncertain global growth picture, with Chinese weakness and the expected Fed lift-off prompting market participants to reassess risks across all asset classes. Hard to tell at this stage whether this sell-off is the long-feared correction or something benign, but the underlying issues have been all along front and center in the Q2 earnings season which is currently winding down.

The data calendar is somewhat on the sparse side this week, with the key jobs reading that will have Fed implications coming out the following week. On the earnings front, we will get a trickle of releases this week, with a total 89 companies coming out with second quarter reports, including 11 S&P 500 members. Overall, this reporting season has turned out to be very weak, with a disconcerting mix of energy sector weakness, dollar strength and global growth challenges not only weighing on Q2 results but also causing estimates for the current quarter to come down. While the magnitude of negative revisions for the current period is tracking below what we saw at the comparable stage in other recent quarters, it is nevertheless negative.

We will discuss what’s happening to current quarter estimates a little later, but let’s focus on the Retail sector for now which has been producing most of the earnings releases lately.

The Retail Scorecard

As of Friday August 21st, we have seen Q2 results from 36 retailers in the S&P 500 index (out of the 43 total) that combined account for 93.6% of the sector’s total market cap in the index. Total earnings for these 36 retailers are up +4.1% from the same period last year, on +5.8% higher revenues, with 63.9% beating EPS estimates and 47.2% coming ahead of top-line expectations.

The side-by-side charts below compare the Q2 growth rates and beat ratios thus far with what we have seen from the same group of 36 retailers in other recent periods.
 

As you can see, the performance momentum for this group of 36 retailers was very much present in the preceding quarter as well, though results are nevertheless above historical levels. The key Retail sector earnings reports this week include Best Buy (BBY - Analyst Report), Dollar General (DG- Analyst Report) and Tiffany (TIF - Analyst Report).

It appears that the Retail sector’s greater domestic orientation is shielding it from the strong dollar overhang that has been the dominant theme with most other sectors lately. Improving consumer buying power as a result of a stronger labor market and lower energy expenses are also benefiting retailers. The sector’s strong stock-market performance lately is likely a reflection of this favorable backdrop.

Q3 Estimates Keep Falling

With the Q2 earnings season effectively behind us now, attention is shifting to the current period, particularly to trends in Q3 earnings estimates. On that front, we are seeing a continuation of the negative revisions trend that has been in place for a while now. Estimates for the current quarter came down as Q2 reports came out and management teams provided weak guidance for the current period.

The chart below shows how earnings growth estimates for Q3 have evolved since the beginning of the quarter.

Total earnings in Q3 are expected to be down -5.4% on -4.9% lower revenues, with 9 of the 16 Zacks sectors expected to have lower earnings compared to the same period last year.

The chart below shows current consensus earnings growth expectations for the coming quarters contrasted with what is expected for Q2 and what was actually achieved in Q1. As you can see, not much is expected in the second half of the year either. But the growth pace is expected to materially ramp next year, with full-year 2016 earnings expected to be up in double digits.

Figure 1: Quarterly Earnings Growth estimates

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These optimistic looking expectations for the outer periods aren’t unusual – Wall Street analysts always tend to be more optimistic about the future. But estimates start coming down as the period in question comes closer. The erosion of 2015 growth estimates was driven largely by what happened to the Energy sector. But estimates for other sectors came down as well and we will likely see something similar to current 2016 estimates as well. Hardly a reassuring backdrop for the current jittery market.  

The Q2 Scorecard

The earnings season never really ends – Q2 reports will keep trickling in through most of next month even as some early Q3 will start pouring in around mid-September (those early Q3 reports will be for companies with fiscal quarters ending in August).

For the Q2 earnings season, we now have seen results from 480 S&P 500 members that combined account for 97.8% of the index’s total market capitalization. Total earnings for these companies are down -2.5% on -3.7% revenue losses, with 69.6% beating EPS estimates and 49.5% coming ahead of revenue expectations.

Figure 2 below shows the current Scorecard for the 480 index members that have reported results.

Figure 2: 2015 Q2 Scorecard (as of 8/21/2015)

Putting Q2 Results in Context  

Figure 3 below shows the comparison of the results thus far with what we have been seeing from the same group of 480 companies in other recent quarters.

Figure 3: 2015 Q2 Results Compared

The left-hand side chart compares the earnings and revenue growth rates for these 480 S&P 500 members with what these same companies reported in the preceding quarter and the average growth rates for these companies in the preceding four quarters (the 4-quarter average is through 2015 Q1). The right-hand side chart does the same comparison for these 444 S&P 500 members, but compares only the earnings and revenue beat ratios.

Here are the takeaways from looking at this chart

1. The earnings growth rate (-2.5%) is notably weaker compared to other recent quarters.
2. Similar to the earnings growth pace, the revenue growth rate (-3.7%) is below what we saw from this group of companies in Q1 (-3.4%) as well as in the 4-quarter average (+1.9%).
3. The earnings beat ratio (69.6%) is tracking above what we saw from this group of companies in Q1, though remains in-line with the 4-quarter average.
4. The revenue beat (49.5%) ratio is better than what these same companies reported in the preceding quarter, and slightly below the 4-quarter average.

The Energy Drag

With most of the Energy sector’s results already out (99.3% of the sector’s market cap in the index have reported), total earnings for the sector are down -60.4% on -31.6% lower revenues, with only 69.2% beating EPS estimates and 53.8% coming ahead of top-line estimates.

This is the weakest performance that we have seen from the sector in any other recent quarter and remains a big drag on the aggregate growth picture for the S&P 500 index. Excluding the Energy sector results, total earnings for the rest of the index members that have reported results would be up +4.8% from the same period last year on +1.0% higher revenues. But as you can see in the side-by-side comparison charts of the index’s growth picture with and without the Energy sector, the index’s growth pace would still be below other recent periods even without the Energy sector.

The Finance Effect

Total earnings for the 99.9% of the Finance sector’s market cap that has reported results are up +7.3% on +1.6% higher revenues, with 67.5% beating EPS estimates and 65.1% coming ahead of top-line expectations. This is better performance than we have seen from this group of Finance sector companies in other recent quarters. The sector’s earnings picture has benefited from a combination of fewer litigation charges, tighter expense controls, and modest improvements in core business lines in an otherwise still unfavorable interest rate backdrop.

Figure 4 below compares the Finance sector results thus far with what we have been seeing from the same group of companies in other recent quarters.

Figure 4: Finance Sector Q2 Results Compared

Please keep in mind that a big part of the +16.5% earnings growth for the sector in the preceding quarter was thanks mostly to easy comparisons at Bank of America (BAC). Adjusted for the Bank of America results, Q2 earnings growth for the sector is tracking better relative to the recent past. Revenues of course are a different matter, as briefly referred to earlier. These results have been better than expected, as the right-hand side chart above shows.

As we did with the Energy sector’s impact, the side-by-side charts below compare the growth results thus far with and without the Finance sector.

Figure 5: Q2 Results Outside of Finance compared

The Composite Picture for Q2

Figure 5 below presents the composite summary picture for Q2 contrasted with what companies actually reported in the 2015 Q1 earnings season. Basically, the table below presenting Q1 as a whole, combining the actual results from the 480 S&P 500 members that have reported with estimates from the still-to-come 20 index members.

Figure 6 – The Composite Summary Picture

As you can see in the above summary table, total Q2 earnings are expected to be down -2.1% from the same period last year on -3.4% lower revenues, with Energy as the biggest drag on the growth rate. Excluding Energy, total earnings for the remainder of the S&P 500 index would be up +5.2% on +1.3% revenues. Among the major sectors, Autos and Medical are big growth contributors this quarter, with Auto sector earnings expected to be up +25.3% and Medical earnings up +15.9%. Excluding Finance, total S&P 500 earnings would be down -4.5% on -4.1% lower revenues.